Recently, a trending topic revealed that only one in 1,000 AI-generated short dramas becomes a hit, sparking widespread discussion. The AI short drama sector appears to have entered an era of intense competition. Last November, the micro-drama market surpassed 50 billion yuan in size, overtaking box office revenue for the first time and establishing itself as a new frontier in content consumption. Some observers have joked that AI short dramas have "killed off" the traditional film market, and now they are turning their competitive energy inward.

Meanwhile, China's first dedicated regulation for the micro-drama sector has emerged. The “Micro-Drama Development Management Measures”, announced by the National Radio and Television Administration, will take effect on September 1, 2026. On one hand, full-chain oversight will accelerate a "good money drives out bad" dynamic. On the other, a tiered regulatory system will leave room for different-sized players to develop. So, how should we interpret the declining hit rate of AI short dramas? What sub-markets or business models within this field deserve attention? Everyday Economic News interviewed Luan Tianxing, CEO of Xin Shi Jue Media, to share his latest observations. He believes that for the AI short drama industry, international expansion can solve the market ceiling issue, intellectual property (IP) can address content barriers, and brand customization can handle cash flow problems. He also noted that the domestic user base for AI short dramas has exceeded 600 million, pushing the industry into a phase of stock competition. The era of rough growth is over, and the industry is shifting from a focus on speed and production volume to creativity, assets, and global layout. Companies with IP reserves and the ability to produce high-quality content will continue to reap market dividends during the industry shakeout.

The micro-drama industry is undergoing a profound transformation driven by deep AI integration. Rapid advancements in video generation models and intelligent production tools have drastically lowered content production costs, fueling an explosive growth in output. AI short dramas have been on a relentless rise, intensifying competition. A semi-annual report from DataEye shows that in the first half of 2026, over 221,900 new AI short dramas were launched online, but only 1,055 surpassed 100 million views, a hit rate of just 0.47%. For AI animated dramas, the hit rate was even lower, below 0.1%. Third-party data from Yunhe and Guduo also indicates that the share of AI short dramas in effective play rankings is far below their share of production capacity.

In Luan Tianxing's view, the declining hit rate of AI short dramas this year is an inevitable result of multiple factors converging, representing a necessary pain point as the industry transitions from rough expansion to high-quality development. "I am cautiously optimistic. I don't see this as a 'failure' of AI short dramas, but rather as the retreat of a bubble and a return to value," he said. "On one hand, the exponential explosion in production capacity has far exceeded the market's ability to absorb it. In the first quarter alone, around 128,000 short dramas were launched, with AI works making up over 95% of that. At peak times, a new AI short drama was being released roughly every 20 seconds. On the other hand, content homogenization is severe, and audience fatigue is accelerating. Many works rely on formulaic plots like male-oriented fantasy, system-style narratives, and post-apocalyptic ascents. AI-generated content often lacks originality and character depth, leading to a flood of homogeneous, assembly-line productions. A large influx of creators who don't understand content and are only looking to monetize traffic has turned AI short dramas into a 'skin-swapping game'," he explained.

Shifts in platform policies are also changing the rules of the game. "Over the past two years, platforms used guaranteed subsidies to stimulate production, leading to a lot of low-quality content. Since 2026, Hongguo has taken the lead by canceling minimum guarantees for AI scripts and switching to pure revenue sharing. Douyin has also tightened its revenue-sharing coefficients," Luan noted. "At the same time, the National Radio and Television Administration has implemented a 'register before launch' policy, and platform review standards have tightened, leading to the mass removal of low-quality, homogenized content. Revenue per 10,000 views has dropped from the hundreds of yuan level to just 5 to 10 yuan, making the speculative 'bet on a hit' model completely ineffective," Luan added.

The reporter observed that just two or three years ago, producing a high-quality live-action short drama cost between several hundred thousand and over a million yuan. Since the beginning of this year, the production cost of an AI animated drama has rapidly risen from around 100,000 yuan to nearly 500,000 yuan. Meanwhile, user acquisition costs remain high, and even skilled traffic teams can only achieve a steady return on investment (ROI) in the narrow profit range of 1.03 to 1.07. Luan Tianxing pointed out that the cost of token usage for AI models continues to rise, pushing production costs from 1,000 yuan per minute to 5,000 yuan per minute. At the same time, traffic costs have more than doubled year-over-year. The cost-saving benefits of AI are not all flowing into the pockets of producers; instead, the largest share is being taken by tool providers and traffic platforms. As a result, over 90% of companies in the animated drama sector are not profitable.

It is worth noting that platforms under the ByteDance umbrella not only control the primary traffic sources for short drama viewing (like Douyin and Hongguo) but also hold significant bargaining power over traffic and content creators due to their content distribution capabilities. They also control upstream resources, including creation tools like the Seedance model and Jimeng AI. AI short dramas are not a "set it and forget it" tool for easy money. AI technology lowers the barrier to production, not the barrier to profit. Teams that can actually make money rely on original scripts and meticulous post-production, not on randomly generating assembly-line short dramas. To some extent, the upstream "bubble" that was sustained by a single system, strong capital, and preferential channel distribution is now bursting. Looking at the long-term trend, this sector still has plenty of market "imagination space."

The reporter learned that while the domestic market is becoming increasingly competitive, the overseas expansion of AI short dramas is forming a second growth curve. TikTok advertising data shows that compared to the beginning of the year, ad spend in North America grew by 954% in May, Europe by 887%, Southeast Asia by 768%, Japan and Korea by 612%, and Latin America by 557%. This simultaneous surge across multiple regions indicates that overseas markets are rapidly embracing AI short dramas. In terms of the overseas model, the translation and adaptation of existing domestic AI short dramas have evolved from early subtitle translation, face-swapping, and lip-syncing to a complete transformation of character images and cultural backgrounds. This means that the overseas expansion of AI short dramas is shifting from being cost-driven to content-driven, potentially opening up more growth space in European and American markets.

"Overseas expansion is currently the most certain incremental market. In 2026, the overseas market size for AI short dramas is expected to reach $650 million, a year-over-year increase of about six times. The overseas market for AI short dramas and animated dramas is expected to exceed $4 billion, a 390% increase from 2025. The emergence of AI has significantly lowered the cost of going overseas, and traditional pain points like high localization costs, slow production scaling, and high trial-and-error barriers are being broken down one by one by technology," Luan explained. He further detailed the favorable factors for overseas expansion. "First, the full opening of short drama mini-programs within TikTok allows smaller teams to avoid the heavy asset investment of building their own apps and test overseas markets more lightly. Additionally, the IAA (In-App Advertising) model is rapidly growing. In the first half of 2026, the number of IAA model products grew from 42 to 105, a 150% increase, providing a more flexible monetization path for content going overseas. The user overlap between overseas AI dramas and live-action dramas is only about 10%, indicating a completely new pool of incremental users," he said.

IP serialization and industrialized production are becoming core barriers to entry in the industry. A consensus has formed that fragmented short dramas lacking stable online novel IP support are unlikely to create long-term hits. IP serialization has become a key survival barrier for companies. In Luan Tianxing's view, companies with IP reserves and high-quality content production capabilities will continue to reap market dividends during the industry reshuffle. "Animated dramas, with their low cost, high production capacity, and strong visual impact, are taking over from live-action short dramas as the main driver of content growth for platforms. For production companies, moving upstream to secure IP resources and build serialization capabilities is a crucial step from simply earning production fees to capturing the long-tail benefits of IP," he said.

At the same time, brand customization and e-commerce closed-loop models are opening up new monetization ceilings. "In the second quarter of 2026, the budget share for short drama-style content from domestic brands increased by 89% year-over-year. Cultural tourism promotion and e-commerce live streaming are the two fastest-growing vertical sectors in terms of demand. Brand-customized dramas have become a core path for content monetization," Luan shared. What other areas of monetization are worth exploring? Luan Tianxing pointed out that AI virtual characters are already being used for live-streaming e-commerce and commercial collaborations. For example, a bracelet worn by a character in a hit AI animated drama has sold over 2,000 units on a single platform. AI digital humans are gradually evolving into a new type of commercial entity on content platforms. Brand-sponsored posts remain the most core and established monetization method for AI accounts. "Furthermore, Taobao has launched a million-yuan incentive plan for AI dramas and opened up its Shuqi library of over 20,000 IPs. E-commerce platforms are personally stepping in to support AI short drama content, meaning the 'watch and buy' content e-commerce loop is accelerating its formation," he noted.

Finally, Luan Tianxing emphasized that for teams with genuine content production capabilities and strategic focus, the current shakeout period is the perfect opportunity to widen the gap. "AI short dramas are not without opportunity, but the threshold for opportunity has risen. Overseas expansion solves the market ceiling issue, IP solves the content barrier issue, and brand customization solves the cash flow issue. These three directions are not mutually exclusive; they can be pursued in parallel as a combined strategy—use brand customization to stabilize cash flow, use overseas expansion to open up new growth space, and use IP serialization to build long-term barriers," he concluded.